|[July 28, 2014]
Fitch Affirms Texas Southmost College District's Ltd Tax Bonds & Notes at 'AA-'; Outlook to Stable
AUSTIN, Texas --(Business Wire)--
Fitch Ratings affirms the following Texas Southmost College District,
Texas (TSC or the district) ratings:
--$52.6 million outstanding limited tax bonds at 'AA-';
--$11.5 million outstanding maintenance tax notes at 'AA-'.
The Rating Outlook is revised to Stable from Negative.
The bonds and maintenance tax notes are direct obligations of the
district payable from a continuing direct annual ad valorem tax on all
taxable property within the limits prescribed by law. The bonds are
subject to the district's limit of $0.50 per $100 of taxable assessed
value (TAV). The tax notes are subject to a separate limit of $0.35 per
$100 of TAV. The district's total tax rate cannot exceed $0.85 per $100
KEY RATING DRIVERS
STOUT CUSHION UNDERPINS INDEPENDENT OPERATIONS: The revision to a Stable
Outlook reflects Fitch's viewpoint that the district is presently
well-positioned to continue its evolution as a stand-alone institution
while maintaining satisfactory finances. Spending remains closely
aligned to revenue trends. Management has expanded operations carefully
and expects to end the first year of independent operations with
break-even results. Sizeable reserves at year-end are largely a result
of one-time sale of property. A balanced budget for fiscal 2015 is
STABLE TAX BASE: The rating incorporates the district's modestly growing
and relatively diverse tax base.
ENROLLMENT TRENDS MIXED: Enrollment reached an all-time low at the start
of fiscal 2014, but has since strengthened. Offsetting a portion of
Fitch's credit concern is TSC's singular position to provide the
programs and cost structure of a typical community college, which should
be attractive to local students The district expects additional students
in fiscal 2015 with its new early college high school program, which
appears reasonable to Fitch. Fitch will continue to monitor the
district's enrollment trends as a key credit factor.
BORDER ECONOMY: Unemployment remains high and exceeds state and national
levels despite solid year-over-year employment growth. Income levels
have grown rapidly, but remain well below average, which provides
practical limitations to the district's tax and tuition-raising
LONG-TERM LIABILITIES MODERATE: Overall debt levels are moderate.
Property negotiations recently finalized with UT-Brownsville (UTB)
afford TSC with some start-up and intermediate-term capital flexibility.
Carrying costs are presently manageable and are expected to remain so
over the near term, although Fitch notes they will rise along with TSC's
evolution as an independent operating entity.
NO RATING DIFFERENTIAL: Fitch does not distinguish between the
maintenance tax notes and limited tax ratings given the district's ample
BALANCED, STABLE FINANCIAL OPERATIONS: The 'AA-' rating incorporates
Fitch's expectation that the district will experience some additional
operating and enrollment pressures as it develops as a stand-alone
institution. The rating remains sensitive to shifts in fundamental
credit characteristics, including the preservation of sound finances and
reserves that provide important financial flexibility. However, the
Stable Outlook reflects Fitch's expectation that material shifts are
TSC is a two-year comprehensive, open enrollment community college
located on the Texas-Mexico border, which has operated jointly with UTB
since 1991. The district is presently in the process of fully unwinding
this long-term academic and operational partnership with UTB by 2015
after both parties decided to dissolve the partnership in 2011.
SOUND FINANCIAL POSITION
Financial performance in fiscal 2013 that remained tempered by the
existing partnership cost structure with UT-Brownsville (UTB) resulted
in solidly positive operations, comparable to the prior year. A positive
11% operating margin was recorded despite some increase to TSC staffing
levels. This was largely due to the district realizing further,
significant reduction in its operating costs from to the unwinding of
the partnership. Through the partnership, UTB provided all academic and
support services for both institutions while the district compensated
UTB with financial support and facilities. Total expenses declined about
24% on a year-over-year basis. Contract payments to UTB constituted
almost 65% of total expenses in fiscal 2013, which was down from 78% the
prior year. Available funds to expenses rose to 43% in fiscal 2013,
nearly double the prior year's 24%. This positive performance was
despite the year's large student loss recorded due in part to the
sharpened identification of each institution's respective student body
for future funding purposes as TSC neared independent operations.
Enrollment attributed to TSC fell by a large 43% to about 3,180
full-time student equivalents (FTSE), down from roughly 5,570 the prior
The district also realized a shift in its key revenue streams in fiscal
2013 as net tuition revenue declined as the primary revenue source and
provided a nearly equal contribution at 34% with property tax revenue.
Year-over-year revenue trends also fell by 23%, comparable to the
aforementioned expenditure decline. Fitch would expect to see the
district's key revenue streams (property tax, tuition/fee, and state
funding) evolve somewhat further as a result of reporting independent
operations beginning in fiscal 2014. TSC's previous partnership
agreement required maintaining tuition in line with UTB; the district
implemented a 1/3 reduction in its cost of full-time tuiton/fees with
the start of its ability to set tuition/fees independently in the fall
2013 semester (fiscal 2014).
TSC's revenue stream will also favorably capture some additional revenue
diversity in the near term with federal, non-operating revenues (largely
Pell Grant) received for low-income students that is currently recorded
by UTB. Fitch expects much of TSC's student population will qualify for
the Pell Grant as most receive some form of financial aid, comparable to
many other Texas community colleges. However, this may create some
susceptibility over time to shifts in the level of federal support for
this discretionary program and the possibility of reduced student
eligibility that could influence future enrollment trends. The Pell
Grant program was exempt from automatic, across-the-board, sequestration
cuts for fiscal 2014, but the program is not protected in subsequent
BALANCED RESULTS PROJECTED; STOUT RESERVES MAINTAINED
The primary operating budget of $30.4 million was adopted as balanced
for fiscal 2014, supported by the key revenues streams of property taxes
($10.7 million), tuition and fees ($9.2 million), and state funding
($7.7 million). Year-to-date tuition and fee revenues are reportedly
about 5% below budget based on enrollment trends, although management
anticipates associated budgetary expenditure savings and increased
property tax collections will sufficiently offset to realize break-even
results at fiscal 2014 year-end.
Enrollment is assumed by management to have reached its lowest point;
FTSE totaled 2,632 in the fall of 2013 or about 17% less what was
recorded the prior year. Fitch however does take comfort that
importantly, the district realized immediate growth in student headcount
of about 585 or nearly 16% growth the next semester, which is in
contrast to typical fall-spring semester enrollment cycles.
The property agreement between UTB and TSC was finalized in mid-fiscal
2014. It resulted in a large one-time pay-out of approximately $29
million to TSC for the sale of properties and various facilities and is
a significant portion of the $38 million in unrestricted reserves
projected by fiscal 2014 year-end (about 75% of total fiscal 2014
budgeted spending). Fitch believes this stout reserve cushion provides
important cash flow flexibility given the likelihood of near-term
operating and enrollment pressures.
The preliminary fiscal 2015 budget is under consideration. Management
indicates a balanced budget is to be presented to the board and the
operating tax rate (roughly $0.10 per $100 TAV in fiscal 2014) is
expected to be adopted at a nominally stable tax rate, well below the
locally-imposed operating tax cap of $0.35 per $100 AV. The district
expects additional students from its new early college high school
program in five local high schools that should boost state funding to
TSC at a relatively modest cost.
TSC is presently accredited jointly with UTB and is pursuing
accreditation as a separate institution given the unwinding of the
partnership. District officials report both internal and external
experts assisting TSC in this process as well as an established timeline
with which to accomplish this objective. Fitch believes this plan
appears reasonable and thus, does not expect accreditation to become a
SOME CAPITAL FLEXIBILITY
The recently finalized property settlement between TSC and UTB addressed
all of the shared campus facilities, land, and back rent owed by UTB to
the district. The settlement also provides capital flexibility to the
district. Some key facilities such as science labs, the library, and
recreation center will be shared between the two institutions over the
intermediate term with the greater portion of operating costs
attributable to UTB given its larger enrollment base. TSC has entered
into various two to four year lease options for UTB's use of certain
facilities at a cost of approximately $2.4 million annually. TSC
maintains some flexibility within the leases to readjust its portion of
facility usage periodically if enrollment growth necessitates.
MODERATE LONG-TERM LIABILITIES
The district has no near-term new money debt plans given these property
agreements and management believes it will have sufficient near-term
facility capacity to accommodate further enrollment growth. UTB is
proceeding with its plans to become part of a new UT institution that
joins UTB and UT Pan American (UT Rio Grande Valley or UTRGV) into a
unified academic university, which may open up additional facility
capacity over the intermediate to longer term. UTRGV is expected to open
in the fall of 2015 and management indicates branch campuses are
expected to be maintained in Brownsville and Edinburg.
Overall debt levels are moderate at about $2,440 per capita and 4.4% of
market value due to substantial issuance by the city of Brownsville and
Brownsville ISD. Principal payout of the district's tax-supported debt
is above average at 68% of principal retired within the next 10 years.
Another $16.7 million in revenue bonds issued by TSC for previous
facility needs are also outstanding (not rated by Fitch). Carrying costs
for debt service (net of self-supporting debt) was manageable at 13.2%
of total expenses in fiscal 2013.
The college participates in the state-administered Teachers Retirement
System of Texas (TRS) for pension and other post-employment benefit
(OPEB). TRS is a cost-sharing, multiple-employer plan in which the state
has historically provided the bulk of the employer's annual pension
contribution. The college's annual contribution to TRS is determined by
state law as is the contribution for the state-run post-employment
benefit healthcare plan.
TSC's direct pension costs have historically been negligible given the
very minimal staffing necessitated by the partnership agreement. Fitch
expects this liability to increase over the near term given the
additional faculty and staffing required for independent operations, but
remain moderate. This is despite legislative changes that balance more
of the state's funding responsibility on Texas community colleges. The
employer's pension contribution is now shared at 50% with the state as
of the 2014-2015 biennium.
MODEST TAX BASE GROWTH IN BORDER ECONOMY
The taxing district encompasses approximately 530 acres in the eastern
portion of Cameron County and includes all of the Brownsville, Los
Fresnos and the Port Isabel Independent School Districts (ISD). Most
students reside within the district. TAV gains have been modest at no
more than 2% annually beginning in fiscal 2010. Management reports a
slightly stronger 4% TAV gain is anticipated in fiscal 2015 based on
preliminary values. Concentration among the top 10 taxpayers remains
The area economy is based on agriculture, fishing, manufacturing, trade
and tourism, and has benefited from its trade links with Mexico. Cameron
County population has realized ongoing expansion since 2000, growing at
an average annual rate of 2%. Area demographic trends favor the
district, characterized by a relatively young population base. County
unemployment remains persistently high despite year-over-year decline,
exceeding the state (5.3%) and U.S. levels (6.8%) at 8.8% in March 2014.
Wealth levels remain low, comparable to other border communities, at
roughly 40% below state and national averages, but have grown rapidly
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, IHS (News - Alert) Global Insight, and the Texas
Municipal Advisory Council.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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